Tuesday, November 10, 2015

Minimum wage equals lower pay and less workers

A long time reader sent me this very interesting comment and question about the federal minimum wage:

“It’s the government’s job is to keep business honest. If business paid a wage that is in line with the cost of living, workers could afford to pay for their housing, healthcare and education without government assistance.

In 1969. the federal minimum wage was in line with the cost of living. “What, in your opinion, has happened since then?”

First of all, the minimum wage and honesty have nothing in common.

Labor is worth the value it creates less compensation for the risk taken by the business that hired the labor. Think about that for a second before reading any more.

Note: there is no reference in that definition to cost of living.

There are also various floors and ceiling that wrap around that value. Labor can never be worth more than the capital it takes to replace it (would you pay a welder $50K per year if you could buy a welding robot than only costs $25K per year to buy and operate?).

Labor is also impacted by supply and demand. If there are lots of people skilled at a job and only few of these jobs to be had, wages will be depressed. The inverse is true if there are few skilled people and lots of jobs.

Again, no mention of cost of living. These numbers are all “soft”; value is perceived by the buyer (employer).

If $1 of labor creates $10 of profit at an auto plant, then those workers are underpaid. That was the case in the early years of auto manufacturing. They unionized and got more. Good for them.

But if they drive their wages too high, they bring capital alternatives into play and cause jobs to be lost. Even before globalization, this was happening in Detroit because the unions pushed their advantage too far.

Most service jobs pay far less than construction or manufacturing because they add less value, require far less skills to perform, and can be more cheaply replaced by capital. McDonalds could easily get a robot that would be the fries in the oil and take them out when they are done. If it cost them $20 an hour to pay a laborer to do that job, they would go with the robot.

In an era where technology is moving so fast and becoming so cheap, be careful with minimum wage laws. BTW, although I think it is only a small part of the equation, ZIRP also makes capital cheaper than employees; Obamacare makes the cost risk of having employees much higher, so you see the mass exodus to part-time to avoid that risk.

The private sector jobs that historically pay the most (median or average real wages) in the U.S. are manufacturing, mining / exploration, construction, banking, and certain professional services. Most of those areas are under assault by our own government, and at the worst time possible because this internal assault is happening at the same time labor markets are becoming global.

I know of several businesses in the last few years that might have opened U.S. factories, but opted not to because they wanted to get to market faster than the regulatory processes would allow. They had plants in China up and running in just a few months; something that would have taken years here.

As we abandon high-value add sectors and replace them with lower-value ones, wages will by definition go down. That is exactly what is happening. You cannot fix the problem by mandating wages, the unintended consequences will far outweigh any benefits.

What the U.S. needs to do is encourage high value-add industries to be here. We must win against global competition.

I believe we can, but not if we keep shooting ourselves in the foot; and not if we think that Government can simply mandate the solution to every problem and that business will take it without a fight.

If “the market,” i.e. the aggregate of those who seek to hire workers and those who seek to work in a particular job and job market, equilibrates at a certain wage level, laws that mandate a different wage level create an inefficiency. Money gets used less optimally, opportunity costs grow, and productivity/productivity improvements lag.

Lets say that the equilibrium wage for those fry cooks is $7/hour, yet the mandate is at $9/hour. And, lets say that the restaurant still needs those 5 fry cooks to satisfy demand. Where does the money come from? The infinitely deep pockets of the money bag owners? If the restaurant was truly that profitable, competition would very quickly drive prices downward until profits matched the owners’ aggregate required minimum rate of return (factoring in risk assumption, capital investment, workload, etc).

What will happen instead, and this is where statists always drop the ball, is that the cost of this labor will be passed on to the consumers. The consumers will then choose to dine out less often, choose to spend less money on other things, or a combination of the two. The fry cooks make more money, but they’re not producing more wealth. Everyone’s standard of living decreases a bit.

And, in the aggregate, reduced sales will reduce employment levels. Maybe this one restaurant still keeps its 5 fry cooks. But, maybe with lower sales levels, a waiter gets cut from the payroll. Or, with less discretionary income available to the consumers, other businesses suffer declines in sales and cut staff.

And, there’s the whole automation issue on top of it. If you raise the minimum wage to the point where it is better for an employer to buy a machine and hire a skilled worker to run it, rather than use two or more unskilled workers, how does that achieve your goal?

Shallow thinking is how such stupid notions as mandated minimum wages continue to have traction. The smart statists know that minimum wages are kabuki/dog-and-pony shows for the gullible and economically illiterate. They’re panders.

The statists who don’t care about the vibrancy of the economy know that minimum wages are overt redistribution, harmful to economies but more “fair” in their overlordish view.

Those who have any sort of ambition learn skills while working at entry-level jobs, and thus increase their worth and their wage. It’s a narrative that’s occurred a hundred million times in this nation – immigrant lands on these shores, often with no marketable skills and limited language skills, and goes to work doing the lowest level of labor. He works, learns skills, gets raises either in-house or by moving from employer to employer, and lo and behold, he’s no longer working a bottom rung job for the lowest wage.

Statists presume that people’s lives are static, when in reality income levels and standards of living are quite dynamic. They often talk about wage inequality, while conveniently noting that the people at the lowest wage levels 10 or 20 years ago are by and large not the people at the lowest wage levels today.

A higher minimum wage gets in the way of upward social mobility by making that first step harder to take. But, you gotta give them credit for consistency. Progressive taxation does the exact same thing: work against people’s upward mobility. Best to keep people down and dependent.

Increasing expenses for a small business with no corresponding increase in income will force many of those small businesses to close up shop, which in turn will decrease demand for workers.

Despite what President Obama and the liberal left would have you believe, not all business owners are rich. Most small business owners are not “rich” but are in the middle class.

Causing those small businesses to close will actually reduce the middle class and increase the lower class.

Minimum wage jobs are not meant to be a living wage. They are entry-level jobs to provide an opportunity to develop some job skills and experience.

Many people understand this, and realize that even working for “nothing” in an internship or a volunteer job for a few months can boost your future prospects considerably. Letters of recommendation can go a long way to upgrading your next form of employment.

Instead of institutionalizing victim-hood in poor people, which is what President Obama and the liberals specialize in, they should be educating poor young people to think past the minimum wage, and focus on their future: work hard, get along with others, move up and make something of yourself. Get some additional training. There is no, and will be no substitute for that in the future.

Brainwashing poor youth that they will stay poor unless the “fat cats” on Wall Street hand over bags of money to them has done inestimable harm to generations of poor kids. Liberals have done more harm to poor people than the “robber barons” of the 19th century who were not always very nice about it, but at least provided opportunities for work.

We live in a global jobs market. Technology is accelerating at finding new ways to do repetitive, and even some non-repetitive tasks, with few or no people. We have a vast “entitlement” network that effectively brings anyone whose income is below the “poverty line” (middle to upper-middle-class in most of the rest of the world) to over that line.

Now introduce a significant minimum wage jump into that mix, and walk through the effects. The 500,000 job loss estimate by the CBO is likely very low, probably by a factor of 3 to 10.

McDonalds is already exploring technology solutions to replace some in-store workers. You just gave them $3 per hour more reasons to invest more in those programs and implement them much, much sooner.

I’m sure WalMart is looking at how to use Amazon robot picker technology in their stores to stock shelves. You just gave them a lot more reasons to invest more and move more quickly.

Lots of companies see the opportunity to move customer service and other clerical functions to India or the Philippines, but have held off because the economics didn’t justify the effort. Now it will. Lots of companies now use co-packers in the US to do high labor-content work at low wages, now moving that work to China or Mexico becomes more appealing. Not to mention that the “labor black market” for illegals will grow as the spread between what you have to pay legal labor v. illegal widens.

All the while, they needn’t worry about the employees they let go; most will be as well off or better getting free Obamacare, SNAP, child care, educations, etc. And the long-term implications for the US economy as a whole isn’t McDonald’s or WalMart’s or anyone else’s problem.

I’d like to see lower and middle-class wages go up. But government mandating it won’t make it happen. We need to focus on finding new ways to use that labor that adds greater and greater value. But that takes hard work and allowing the private sector to have the room to experiment.